ForexAmple ? Currency currents and raisons (d''être)
Paul spoke about FX when appearing on Bloomberg's Daybreak Middle East earlier this month
Currency Affairs
The Renminbi has weakened since February last year, giving up all the gains that it had accumulated since the autumn of 2019:
USD:Renminbi cross rate Source: Bloomberg
This weakness is to be expected in that it maps reasonably well, when adjusted for time-lag, to China’s reduction in USD holdings in its reserves (i.e. China has been selling US Dollars and Dollar-denominated assets). It also belies the nonsensical comparisons that have surfaced recently between China today and Japan in the 1980s. We can’t conceive of China revaluing its currency upwards to suit western trade partners in the way that Japan agreed to do, an action that heralded the bursting of the Japanese bubble in 1989 and the subsequent ‘lost decades’. To an extent, a weaker currency can enhance the competitiveness of terms of trade, making exported goods and services more attractive and imported goods and services less attractive. Boom’s Gerry Brady has also demonstrated that a weaker currency can spur upside in asset prices that more than compensates for the currency downside. With all this in mind, Paul told Bloomberg’s Manus Cranny and Yousef Gamal El-Din that he was relatively unconcerned about Renminbi weakness.
Paul: “The key point about China’s currency depreciation is that it is managed and gradual. There are no big surprises or panic measures. A lot of the further stimulus we're going to see is inevitably going to lean against the currency so we may see ongoing Yuan weakness but I don't think that's a problem. To the West that seems to be a huge problem but in China, where there's muted inflationary pressure, having a weaker currency doesn’t seem to pose a major drama to Chinese policymakers. They seem to be prepared to live with that as a consequence of graduated, strategic longer term stimulus policies and the transition towards a more consumption driven economy. Markets have been so conditioned to the way the Fed operates (where it's a case of pedal to the metal and then an emergency stop) that markets are just not really buying into this gradual approach. They don't understand it.”
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Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment planner.
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